By Mark McSherry
Global financial shares lost about $465 billion in stock market value in two days as investors cut exposure to lenders following Silicon Valley Bank’s collapse, according to Bloomberg.
Victoria Scholar, Head of Investment, Interactive Investor: “In a frenetic period for markets, European indices have started the session oscillating between gains and losses with the FTSE 100 trading lower while the DAX is currently in the green.
“Land Securities, British Land and Rightmove are among the outperformers on the UK index amid hopes of a dovish tilt from the Bank of England. Most European banks continue to face selling pressure with HSBC and Standard Chartered near the bottom of the FTSE 100.
“Credit Suisse is leading the declines across European financials after the Swiss lender said it found ‘material weakness’ in its internal financial reporting controls, adding to its woes.
“Markets in Asia fell sharply overnight with the Nikkei, the Kospi and the Hang Seng down more than 2% each. In Japan its biggest banks suffered steep losses with the TOPIX Banks index down by more than 7% after President Biden’s address failed to soothe investors.
“US futures are pointing higher after indices on Wall Street closed mixed on Monday with the Nasdaq closing in the green. However the Dow suffered its fifth day of declines and the Russell 2,000 ended down 1.6%.
“First Republic Bank plunged nearly 62% and Western Alliance Bancorporation slumped 47%. Wall Street heavyweights like JPMorgan, Citigroup and Goldman Sachs look set to recoup some losses at the US market open at lunchtime.
“Markets have been weighing up concerns about financial contagion from the SVB fallout versus the consequent possibility of less aggressive tightening from the Federal Reserve next week. Traders are now pricing in a 50% chance of no change to interest rates in March, a significant climb down from expectations for a hike of between 25-50 basis points just last week.
“Nomura has gone a step further and is forecasting that the Fed could even cut interest rates next week in what would be a major U-turn in central bank policy.
“This has prompted significant volatility for the bond market with the two-year US treasury yield posting its biggest one-day drop since 1987 as bond prices rebound.”
Susannah Streeter, head of money and markets, Hargreaves Lansdown: “A sea of red has descended on indices as banking stocks continue to be sideswiped in the wake of SVB’s collapse and worries reverberate about the tech sector’s fragility.
“Those niggling concerns that mild recessions could be on the way have been replaced by a wall of worry about runs on smaller banks like First Republic, and the risk that larger institutions may turn more risk averse to lending amid this volatility, prompting deeper downturns.
“The feared knock-on effect for the global economy is showing up in a falling oil price. Brent crude futures have dropped below $80 a barrel, to a level not seen since early February. Gold prices, considered to be a hedge against economic uncertainty, is holding above $1900 an ounce, after jumping 2% on Monday.
“The bond markets have whipsawed in reaction to the banking sell-off, with the market now expecting that the Federal Reserve will be forced into go-slow on further rate hikes or even press pause this month, to restore financial stability.
“US Treasuries have shot up, and yields have fallen back, although they have crept up ever so slightly as some speculation grows that Jerome Powell won’t want to completely back-track from his intention to keep cooling down inflation. The CPI figures out later will be watched super-closely as another hot reading will reinforce expectations that a rate rise, albeit smaller, will be on the cards next week.
“The Bank of England will be keeping one eye trained on the global banking rout and another trained on the latest UK labour data showing a slight cooling off in wage inflation and an increase in vacancies.
“The labour market is edging in the right direction and loosening up, indicating interest rate hikes are having an impact on demand. But it might not be quite enough to assuage inflation concerns, so the Bank of England’s monetary policy committee may still vote for another 0.25% rate hike this month. However, any further intensifying of the banking sell-off and a fresh deterioration in the global economic outlook this week could see more policymakers vote to keep rates on hold.
“The expectation that the hiking cycle won’t now go quite so high in the US did help the broader S&P index, which closed only marginally lower, but losses became entrenched during trading in Asia, with the fear factor spreading.
“Although immediate financial lifelines for tech start-ups around the world have been maintained, attention is now turning to how they will be able to secure fresh funding for the longer term, particularly with venture capital drying up and investors reeling from the SVB shock.
“Attention will be trained later on European banks, which were battered by worries about malaise spreading. Although the deposit backstops from US regulators have quelled fears of wide contagion in the financial sector, eye-watering falls in the share prices of smaller regional banks demonstrates the loss of shareholder confidence.
“Bigger banks are sitting on big unrealised losses in their bond portfolios, although they’re still considered unlikely to be forced to liquidate their bond holdings due to their stable deposit holdings, and greater capital buffers.
“The expectation is that banks will have to work a lot harder to attract customers, given this turn of events, to stop them pulling their bank deposits to put money in other assets with a higher rate of return like short term government bonds. They will need to retain deposits and attract more capital in, and this is set to have an impact on their net interest margins at a time when confidence is already being sideswiped.
“At a time when the drinks and hospitality industry has had to deal with painful inflation, amid higher energy costs and wage increases, estimates that an even sharper rise in duty on alcohol could be on the way is another unpalatable development.
“With the bell set to be run on the duty freeze, a hike of 10% was expected but now it’s rumoured that Jeremy Hunt may increase duty by the higher RPI level of inflation. Already companies were bracing for steep rises due to a shake-up in the alcohol duties in the summer, with stronger drinks like wine and port taxed more. Analysis from the wine and spirit trade association shows a bottle of plonk will be at least 44p more expensive from August.
“It’ll leave a bitter taste for wine suppliers and drinks makers like Diageo. It would round off a particularly turbulent week for Naked Wines, which banked with the collapsed SVB and at the weekend was facing an existential crisis until HSBC snapped up the UK arm.”
Richard Hunter, Head of Markets at Interactive Investor, said: “Bank shares globally continued to feel the reverberations from the fallout from the Silicon Valley Bank issue, with general sentiment weakening as a result.
“US markets finished mixed to weaker, underpinned by a joint statement from authorities such as the Federal Reserve and the Treasury that SVB depositors could access their money, while a new programme to safeguard deposits would also be created. At the same time, the flight to safety resulted in higher bond prices and therefore lower yields, which lent some support to equities.
“Within the equities space, there was also some buying of defensive stocks, while in the technology sector there was further support with the likes of Apple finishing higher.
“The fallout from the SVB collapse also led traders to question whether the Federal Reserve would reconsider its current interest rate hiking policy. Whereas the vast majority had been pricing in a further rise of 0.25% at the March meeting, there is now considered to be a 50% chance that the Fed will not raise rates at all.
“However, the picture is far from clear and a couple of economic prints over the coming days could further complicate the Fed’s strategy. The imminent consumer price index reading is expected to show a rise of 6% in February, compared to 6.4% in January and 6.5% in December. Along with the retail sales number which is due on Wednesday, the Fed will need to consider the overall picture given both the nature of those two prints alongside the current jitters which SVB has introduced.
“In the meantime, the main indices have given up most of the gains made from what had been a strong start to the year. Indeed, in the year to date, the Dow Jones is now down by 4%, the benchmark S&P500 has eked a gain of just 0.4%, while the Nasdaq remains ahead by 6.9%.
“Asian markets unsurprisingly followed suit, with particular weakness being extended in banking shares. The sector was hit in both Singapore and Australia, but most markedly in Japan where systemic risk concerns weighed on what had been a relatively outperforming sector of late.
“UK markets also drifted in early trade, with banking shares continuing to slide, albeit at a slower pace. The declining sentiment has been enough to wipe out gains for the FTSE250, which is now broadly unchanged in the year to date, although the FTSE100 remains up by a modest 1.2%.
“While it will take some days for the full ramifications to become clear, investors are once bitten, twice shy after the events of the Global Financial Crisis, when the full extent of the inter-connectedness of the banking world took some time to unravel into a generational shock.
“There is little to suggest a repeat at present, but in light of the investing backdrop and the possibility of other pressure points which are yet to emerge, investors are currently choosing to err on the side of caution.”